Dallas (TX) – Playing the new high-def video market much more safely than its competitor Netflix – which proclaimed last January it would fully and unabashedly support both HD DVD and Blu-ray high-definition disc formats – Blockbuster confirmed to TG Daily today that it will make HD DVD rentals available next Tuesday to its online subscribers only, with Blu-ray titles following in May. This decision comes in the wake of a full evaluation of Blockbuster’s place in the video delivery market, one result of which may be a pullback from migrating toward the video-on-demand market.
But the announcement came parenthetically – not trumpeted like Netflix – in a news brief about a customer survey about their willingness to adopt new high-def formats. The results of that survey are in alignment with those from research firms over the past year: Of the Blockbuster Online subscribers surveyed (the total number of which is not available), 55% currently own high-definition viewing equipment, and 47% would be interested in viewing a high-def movie. But only about a third were interested in purchasing an HD DVD or Blu-ray player, the key cause of their reluctance being price.
As a result, next Tuesday, Blockbuster Online will enable its users to browse and rent HD DVD titles, with Blu-ray titles to be added on 23 May. Just how much “browsing” users will be able to do will be limited to the number of titles studios will make available – which, a Blockbuster spokesperson confirmed to TG Daily today, will be limited to a grand total of four: The Last Samurai, Million Dollar Baby, Phantom of the Opera, and Serenity. Availability of these four titles online will not be guaranteed, we were told, although they should each count as single rentals just like any other DVD rental, for members with rental plans.
The purpose of this program, Blockbuster’s Randy Hargrove told us, is to gauge consumer acceptance levels of high-definition formats, to determine whether it’s time to make these titles available through Blockbuster’s retail outlets. As a result, making high-def titles available in-store will wait until the success levels of the online sampling program indicate it would be viable for Blockbuster to do so. In the meantime, Hargrove said, the company will watch consumer penetration levels for HD DVD and Blu-ray players and recorders, which the online survey highlighted as a potential roadblock for wide customer adoption.
Hargrove cites some company history: The company initiated its rollout of the DVD format in stages in December 1999, prior to the launch of its online rental service. A small number of stores were chosen for the initial stages of the rollout, so the company could gauge consumer reaction. As DVD player prices started to fall – more accurately, to plunge – consumers appeared clearly ready to adopt DVD, and the phase-out of VHS rentals began. Today, Blockbuster could have adopted a similar test program for high-def, but studios aren’t making enough titles available in these early stages. So instead, the company is relying on online sampling, although Hargrove admits, there are no set levels determined yet which would serve as clear signals of customer adoption – no percentages, and no timeframes.
The impediment to Blockbuster’s being able to make these determinations is related, according to Hargrove, to the same problem its own customers are reporting: the high price of Blu-ray and HD DVD players. How soon manufacturers would be willing to start ramping those prices down isn’t clear. So while Blockbuster believes high-def formats represent a new opportunity for consumers, Hargrove stated, it remains uncertain how soon those consumers will be able to realize that opportunity.
This morning’s statement quotes the company’s senior vice president and general manager, Shane Evangelist, as saying, “It’s the old beta versus VHS dilemma. There’s no way to know how long it’s going to take for the general market to decide which formats will ultimately prevail. So while this shakes out, we’re just going to listen to our customers and make sure we give them the movies they want in the format they prefer – whatever the technology.”
To that, Hargrove adds, “I think one [high-def] format would have made it easier on consumers and retailers, but we will look at what the formats are, and consumer demand, and work within the framework of what is released.”
Blockbuster sees dim future for video-on-demand
Another major player in the high-def video debate is Microsoft, whose chairman, Bill Gates, has been quoted several times recently as saying that video discs are fast becoming historical remnants, as digital delivery of multimedia content evolves to what Gates calls “all bits.” Recently, Microsoft’s Richard Doherty told TG Daily his company believes the convenience of being able to call up high-def movies on demand, without relying on the mailbox or trips to the video store, will drive the multimedia industry away from the rental model and towards video-on-demand (VoD).
That point of view, Blockbuster’s Randy Hargrove stated today, is ignorant of the multimedia economy, which he said remains studio-driven. If a viable business model were to emerge for Blockbuster to enter the VoD market, he said, they’d be eager to do so, based on what he cites as the company’s outstanding relationship with its existing customers. But after cinematic releases, studios’ key source of revenue comes from DVD sales, some of which are made to rental firms like Blockbuster and Netflix. Citing figures in front of him, Hargrove said studios today make $15 gross profit for each sale of a DVD to the direct-to-retail (i.e., non-rental) market. Compare that to only $3 gross profit for each video-on-demand transaction. Actually, studios reap as much as $5 to $7, but end up sharing 50 – 60% of revenue with the service providers who make the transactions possible – network carriers and CATV providers.
VoD transaction prices can’t rise without making them cost-prohibitive to consumers, especially in comparison with rentals. For an equitable economy of scale to be worked out, Hargrove said, studios would have to come to some sort of bargaining agreement between themselves, the carriers and service providers, and the vendors selling the service at the customer end. That, he implied, would be unprecedented…and perhaps very unlikely. But until such an agreement happens, the VoD “window of availability” might never be moved up, at least in North America, to be in sync with that of DVDs, high-def or otherwise.
Citing figures supplied to Blockbuster by Kagan Media Research, Hargrove said, total consumer spending in-home for movie viewing in the US constituted $25.4 billion in 2004, rising to $28.1 billion in 2005. Of that latter amount, a full $26.8 billion (over 95%) was spent on DVD and VHS rentals. The remaining trifle was dedicated to pay-per-view and video-on-demand services (excluding adult media, which Kagan does not track). Today, quite possibly, said Hargrove, DVD sales have become movie studios’ single largest revenue stream. “They wouldn’t do anything to cannibalize that revenue model,” he said.
If Hargrove’s theory holds out, it could actually spell bad news for both high-def disc formats. One of the hallmarks of the AACS copy protection model, being adopted by both HD DVD and Blu-ray, is the future ability for users to download videos from the studios’ “Clearing Houses,” and record their downloads to blue-laser media. This part of the model constitutes the olive branch that proponents of both formats have been offering to the Internet and CATV carriers who would make online connections – and thus, mandatory managed copy (MMC) provisions – feasible. In other words, VoD is the answer to the carriers’ question, “So what’s in it for me?” If the studios end up unwilling to fulfill the promises of VoD availability that device manufacturers may very well have made on their behalf, carriers may be less compelled to make online services available to owners of the second generation of high-def disc players – assuming there is a second generation.